The Amazing Reversal of the US Oil Industry

A few years ago, I made the observation that the best thing that could happen to mitigate against some of the potentially severe consequences of peak oil was for oil prices to rise, and remain high in the years before oil production peaked. That would have the effect of encouraging conservation, as people adapted to a world in which oil is no longer cheap. High oil prices would also incentivize oil production, which would have the effect of preventing steep declines in global oil production — which some had predicted would lead to severe economic crisis or possibly economic collapse.

We have certainly seen both conservation and increased oil production, but I have been really surprised by some of the details of how it has happened.

For example, as oil prices raced to $100, consumption in the US and Europe declined as I expected. But consumption in all developing regions increased sharply — so much so that the net impact was for global consumption to increase.

I didn’t expect this; rather I expected that we would see oil consumption decline across the board.

But perhaps we simply have not reached an oil price high enough to discourage increasing consumption in developing countries. We have to keep in mind that per capita consumption in these countries is very low, so oil makes up a small part of individual expenditures.

But the second surprising thing — actually “stunning” would be a more appropriate descriptor — is the extent to which oil production in the US has reversed direction. I always expected that peak oil would be a function of oil prices. In other words, if oil prices were fixed at $25/bbl, I have no doubt that global oil production would be in decline. In other words, we have passed “peak $25 oil.”

But oil prices are not fixed, and as oil prices rose more and more marginal production began to make economic sense. The development of horizontal drilling and hydraulic fracturing (fracking) opened up vast new supplies of oil by the time the price reached $100/bbl.

Oil production in the US began to rise in 2009, in response to record capital expenditures by oil companies in the face of sharply rising oil prices starting in about 2005. The production increase has been sustained to the point that production rose all four years of President Obama’s first term. To put that in perspective, that’s the first time this has happened since the 1960′s when Lyndon B. Johnson was president.

For those who watch production numbers from the Energy Information Administration (EIA), it was clear that 2012 was shaping up to be a big year. US oil production rose above the 6 million bpd mark in late 2011 — for the first time since 1998. By the end of summer 2012, production had risen by another half million bpd. (Source).

Last week the American Petroleum Institute (API) released their Monthly Statistical Report [pdf], which puts 2012 — and the current status of US oil production — into perspective. According to the API, in 2012 US oil production increased by 779 thousand bpd — an increase of 13.8% over 2011 levels. But more amazing is that this marks the largest annual increase of oil production in US history. Further, the EIA predicts another jump of 900K bbl/day in 2013.

If you had told me in 2005 that we would see these kinds of production gains in the US, I would have thought you were crazy. I have always cautioned people that the future is uncertain, no matter how certain you may be of a particular outcome. I know people who were absolutely positive that by 2013 we would see natural gas at $15/MMBTU and oil at $300-$500/bbl. Then along came fracking and those expectations were turned upside down.

I still think it’s going to be difficult to threaten the all-time US production high of 1970. For two consecutive months in 1970, US oil production exceeded 10 million bpd before beginning a very long decline. But I have been so shocked by the rapid rise in US oil production, I will no longer say it is impossible. I simply don’t know how long this revolution might run, but it won’t take too many more years like 2012 and the US will be pushing up against the all-time production record.

I would think the decline in the value of the U.S dollar combined with other pressures such as use of other currencies in pricing and selling hydrocarbons and the preference to switch from liquid rich gas wells has played some part in this. Good analysis either way.

As always, oil doesn’t equal energy. Absolute quantity of extracted oil will, no doubt, increase for a while, however as we produce more and more of this “crud oil,” net energy by volume will continue to drop and production costs by volume will continue to rise.

Speaking of Hubbert, I’ve been wondering when Deffeyes would offer some comment on the US tight oil and gas boom. He used to offer commentary like clockwork on his Current Events page (http://www.princeton.edu/hubbert/current-events.html) immediately after the API production numbers came out each year. But that was back when the numbers agreed with his peak oil predictions. He hasn’t offered anything since December 2011. Of course, he is retired and may not have any interest in blogging these days.

All this smacks of a natural reaction to the underlying reality that was so effectively captured in Sam Avro’s thoughtful piece of last July where he offered a no-nonsense analysis of inflation-adjusted energy costs. The truth is that these oil prices finally caught up in the US (where we are too well-versed in denying reality–just take a look at policymakers in Washington:) to achieve production sustainability. Few of us welcome such adjustments when they come precipitously and offer a pinch to our discretionary budgets. This is particulary true in the midst of a recession that had wrung a significant measure of value from two of our most important asset classes for household savings: residential real estate and IRA/401 K accounts. We suffered, in effect, a reversal of the so-called “wealth effect” at the very time that an adjustment in oil prices was seeking a benchmark that might pose sufficient inducement to greater production sustainability.
I find the author’s surpise a bit surprising given that his own analysis has historically tended toward an anticipation of the not-so-unintended consequences of a dynamic marketplace that tends to seek rates of return that aim toward real (and opposed to nominal) returns on investment. The oil industry is seeking these real returns with an eye toward what RR has long anticipated and explored in this space; the future production costs in extracting fossil fuels will by nearly all accounts continue to point toward a greater burden in achieving handsome profits without concomitant progress in technology and international cooperation; two factors that are hardly a given if past is prologue.
If we experience a (re)correction in existing oil prices, well, the propsects for achieveing sustainability remain all the more probelematic. I guess we could say it’s the specter of the old pushmepullyou that nudges one’s memory. Ah, where is Dr. Doolittle when you need him:)?
Ben

We are far from peak oil production globally. Iraqi oil production could exceed 12 million barrels a day in a few years. Venezuela, Canada, former USSR, all have substantial untapped resources. As does Nigeria and many parts of Africa.

Could increases developing world consumption despite $100+/barrel oil prices have something to do with the government subsidies provided so consumers in those countries don’t see the full cost of oil??

Yes. Particularly in countries that are oil exporters, they can afford to shield their citizens from the full cost of oil. It costs them in lost revenue, but raising fuel prices is always politically unpopular.

Shale gas is an oil substitute and indeed can be converted into it if desired, is available in enormous quantities; methane hydrates will be available in an order of magnitude more and oil produced by bioengineered algae will become available in unlimited quantities.
The era of cheap energy is at hand and is only being held back by political parasitism.
Since gdp goes in close step with energy use the era of massive human wealth is too.